Dear Jim Chalmers: Here Are Better Ways To Fix The CGT Discount Without Harming Business & Their Investors

Treasurer Jim Chalmers spent months building up the case for changing Australia’s capital gains tax discount on investment properties, only to apply it to all asset classes, purportedly just because people would create companies or trusts just to buy real estate and still access the discount.

Correcting a distortion that inflates residential land prices without removing concessional treatment from founders, operators, and long-term business owners who have spent decades taking genuine entrepreneurial risk is possible.

But conflating the two, as current reform proposals risk doing, would represent a significant policy error. In our view, there are several middle-ground reforms that raise revenue, improve fairness, and preserve incentives for productive capital formation, without treating the sale of a business built over twenty years as equivalent to flipping a speculative property after twelve months. And we outline them. You’re welcome.

The Problem With a Blunt Instrument

The 50% CGT discount has attracted sustained criticism since its introduction in 1999, largely because the most visible beneficiaries have been property investors whose gains owe more to land scarcity and monetary policy than to entrepreneurial effort. That criticism is reasonable, and the political momentum behind reform reflects genuine community concern.

What is less reasonable is the assumption that the same remedy applies equally to a retiree selling a small business they founded, a farmer selling land they have worked for thirty years, or a startup founder crystallising a decade of illiquidity and reinvestment risk. Taxing all three scenarios at full marginal rates of up to 47% is not reform; it is a blunt instrument dressed as one.

The ten alternatives we’ve listed below draw on proposals that have circulated through the Henry Tax Review, accounting body submissions, and comparable reforms in Canada, the United Kingdom, and the United States. None of them is radical. All of them are more targeted than simply abolishing the discount.

Ten Ideas for Jim Chalmers To Fix The CGT Discount Without Harming Businesses And Their Investors

1. Reduce the discount rather than abolish it

The cleanest political compromise is also the most straightforward: lower the discount from 50% to somewhere in the range of 33-40%, rather than removing it entirely. This preserves the underlying rationale (recognising inflation and rewarding long-term risk-taking as well as to reduce the complicated paperwork – which is why we pivoted to a percentage discount in the first place) while raising meaningful additional revenue.

A 33% effective concession has become the implicit “middle ground” in several comparable jurisdictions, whilst 40% was what the Henry Review suggested. For founders and SME owners, taxing their the entire nominal gain at 47% can produce outcomes that look punitive once inflation and time value are properly considered.

2. Introduce a sliding scale tied to holding period

A major structural flaw of the current system is that a 12-month holding period attracts the same 50% discount as a 20-year one. A more calibrated approach would apply a sliding scale: no discount for assets held under two years, a 25% discount for two to five years, 40% for five to ten years, and the full 50% discount only for assets held more than a decade. This design encourages genuinely patient capital, reduces short-term speculation incentives, and draws a clearer distinction between investing and trading. It would particularly reward founders who spent ten or twenty years building a company, which is precisely the behaviour tax policy should support.

3. Reintroduce indexation alongside a smaller discount

Australia used indexation before the current discount regime, and there is a strong technical case for returning to it. A hybrid model could index the cost base for inflation and then apply a smaller discount (say, 20%) to the resulting real gain. Or perhaps even pick the higher of a fixed discount (i.e. 33%) or the inflation-adjusted discount. This isolates genuine economic gains from phantom profits created by rising price levels.

One of the most compelling objections to taxing full nominal gains is that someone who acquired a business in 2006 and sells in 2026 may face a very large nominal gain that is considerably smaller in real purchasing-power terms. Indexation is not a concession to the wealthy; it is a correction for a known measurement problem.

4. Distinguish active business creation from passive asset appreciation

A politically attractive option is extending the logic that already exists in Australia’s small business CGT concessions: different rules for active businesses compared to passive asset appreciation. Tightening concessions on investment properties and portfolio shares, while preserving or expanding them for founders and operators, would align the tax system with the proposition that entrepreneurship deserves different treatment from passive speculation.

The current small business concessions point in this direction but are widely regarded as too narrow and too complex. Expanding and simplifying them is a more coherent policy response than treating all capital gains identically.

5. A lifetime exemption cap for founders

Canada’s Lifetime Capital Gains Exemption provides a useful precedent: the first tranche of gains from selling a qualifying business attracts concessional treatment, with gains above the threshold taxed more heavily. Australia could adopt a similar structure, perhaps exempting the first A$2m-A$5m of lifetime gains from small business sales.

This protects retirees selling family businesses and long-term owner-operators while raising additional revenue from very large exits. The political appeal is obvious: it concentrates concessions on “ordinary business owners” rather than very wealthy investors, which is the outcome most reform advocates claim to want anyway.

6. Tapered effective tax rates instead of a binary discount

Rather than a binary 50% discount triggered at exactly twelve months, a taper system would reduce the taxable proportion of a gain progressively over time: fully taxable in year one, tapering to 80% taxable at three years, 70% at five, and 50% at ten. This produces smoother incentives and removes the well-documented distortion whereby investors delay asset sales purely to cross the twelve-month threshold. The current “cliff” creates real economic deadweight loss; a taper eliminates it while maintaining the same long-run revenue profile.

7. Lower the rate on inflationary gains specifically

A more targeted technical reform would split the gain into its inflationary and real components, taxing each at a different rate. Under this approach, the inflation component of a gain might be taxed at 10-15%, while the real component is taxed at standard marginal rates.

This is arguably the most economically rational of the ten options, particularly for long-duration assets including farms, private businesses, and infrastructure where nominal asset values can rise substantially over decades largely due to general price-level changes rather than underlying improvements in productive value.

8. Rollover relief for business reinvestment

One legitimate concern with any CGT tightening is that it discourages capital recycling: the founder who sells a business and reinvests in a new one may face a tax liability at the moment of reinvestment rather than at the moment of final consumption.

A reform package could offset tighter headline rates with expanded rollover relief, allowing deferral of CGT where proceeds are reinvested into qualifying Australian businesses. The underlying principle is that tax should follow the consumption of capital rather than its redeployment, and this structure would support startup funding and domestic capital formation without preserving the full existing concession in its current form.

9. Better company tax integration instead of headline discounts

A more structural alternative would address the underlying reason the 50% discount was introduced in the first place: to partially offset the double taxation of corporate profits and to compensate for the absence of inflation adjustment.

Rather than a large headline CGT concession, governments could lower SME company tax rates further, expand franking flexibility, or introduce founder-specific offsets. This shifts support toward operating businesses rather than asset appreciation alone, and it engages more directly with the real distortion (the interaction between company tax and personal income tax) rather than applying a blunt discount to all capital gains.

10. Grandfathering existing assets

Even if substantial reform is pursued, applying new rules to assets already held would represent retrospective policy change of the kind that erodes sovereign risk confidence and disrupts legitimate succession planning. Business owners in particular structure their retirement and estate arrangements around existing CGT assumptions, often years in advance.

Grandfathering existing assets under current rules, while applying reformed rates to new acquisitions, would significantly reduce dislocation. It would not eliminate revenue gains over time; it would merely defer them, which is a reasonable price for maintaining policy credibility.

Conclusion

The argument for removing the CGT discount on residential property is coherent and the political case for it is clear. The argument for extending that same removal to active businesses, long-held farms, and founder exits is considerably weaker, and the evidence from comparable jurisdictions suggests that high effective tax rates on entrepreneurial capital gains reduce business creation, inhibit succession, and push capital toward less productive uses.

The ten options above are a recognition that the status quo contains genuine distortions that can be corrected without punishing the class of risk-takers that an advanced economy most needs to reward. Targeted reform is better policy than uniform reform, and in this instance, the targeting is not difficult to design.